Once again it seems the small cap world provides a ray of light for investors with a tiny niche player roaring, or at least shouting, on the world stage.
It is hard to argue that there's a more troubled industry than steel manufacturing in the wake of BlueScope's announcement that it is shedding more than 1000 workers from its Port Kembla and Western Port operations, which makes the company's share price slide of almost 60 per cent in the past four months.
In contrast, the shares of Bisalloy Steel Group, another steel manufacturer, have climbed about 67 per cent over the same period. The rise is primarily due to investor optimism about a joint venture the company announced to manufacture its Bisplate steel technology in China with Shandong Iron and Steel, and then to sell directly into that market.
Bisalloy uses German technology and feed stock from the likes of BlueScope to make high-tensile quenched and tempered steel plate, or “Bisplate”, at Unanderra, south of Wollongong in NSW. It's a high-strength, lightweight steel that's used in the manufacture of things like large dump trucks, dragline buckets and cranes – all used in, you guessed it, mining.

So, on the face of it, it's off to the races for this little Aussie battler. But even after the stellar share price rise, at 18.5 cents, this company has a market cap of only $43 million, which tells a story in itself. In comparison, BlueScope and OneSteel have market caps of $1.4 billion and $1.8 billion respectively.
The one broker that covers it, Foster Stockbroking, has a 55c price target. Its discounted cash flow valuation is largely predicated on a continuation of the recovery of global steel prices, and the success of the Chinese joint venture.
The first assumption doesn't seem too bold, but the second does. Many joint ventures like this have failed because of unmet or possibly unrealistic expectations from small companies operating in a country with a different legal system and corporate practices. Intellectual property is the X factor in this equation. The big risk, to put it bluntly, is whether Shandong Iron and Steel gets its hands on it.
Another big risk is the amount of debt Bisalloy is carrying. At 30 June debt stood at $15.8 million, which is big for a little company that must fund massive inventory capital requirements (in the last result working capital stood at $15.6 million). It also goes without saying that the high exchange rate makes it hard for Bisalloy to compete with Asian and European competitors, and is underlined by BlueScope's decision to no longer export its products.
In Bisalloy's favour right now is its management and its intellectual property. Whether these factors ensure that it is still around in five years is the big question, let alone whether the company makes a motza in China.
Collins Foods left behind in the flight to safety
Defensive stocks have been doing very well during the recent volatility, thank you very much. These are companies whose earnings are not heavily reliant on whether people's discretionary spending declines as economic growth in the economy stalls. They include utilities such as AGL and providers of what people deem as necessary to get them through the various vicissitudes of life.
Compare the average PE for the market of about 12 times, which big stocks like AGL and Coca-Cola Amatil, which both trade on forecast multiples of close to 16 times, while Dominos, the pizza chain, trades on a whopping 20 times.
This brings me to a small cap in the defensive class that hasn't done so well, but could provide investors with an opportunity.
Collins Foods (ASX: CKF) is a recently listed KFC and Sizzler franchisee operator. At $1.99, it is trading well below its $2.50 issue price when it listed on the ASX last month, having raised just over $200 million. The company seems to have fallen through the cracks, listing at a difficult time, and currently trades on a forecast PE of about 7 times.
The 119 KFC stores it has franchises over are mostly in Queensland, while the 85 Sizzler stores are across Australia and in Asia. Its previous owner, the private equity fund Pacific Equity Partners, did not invest in the business, according to one invested fund manager. So there is an opportunity to grow the business by opening new stores and by refurbishing existing ones. To this end, the company plans to spend $35 million this financial year.
To top it off, the dividend yield on Collins is 7 per cent. KFC and Sizzler isn't appetising for some but they might be interested in menu above.
Richard Hemming (r.hemming@undertheradarreport.com.au) is an independent analyst who is launching a fortnightly newsletter on 22 September: www.undertheradarreport.com.au. He has written columns on small caps for the Financial Times and for the Australian Financial Review.